Xbox One Could Be the Key for MSFT Stock

by Tom Taulli | January 9, 2014 6:00 am

For a company of the scale of Microsoft (MSFT[1]), it’s pretty tough to find new sources of growth. The company really has no choice but to target mega market opportunities. If not, it’s a good bet that MSFT stock will likely underperform for the long haul. But there is one asset that could provide a catalyst for growth: the Xbox One.

[2]Last November, MSFT launched the latest version of its gaming console. Through a period of only 6 weeks, it has sold about 3 million units. It was a solid performance, no doubt helped by the holiday season release.

Xbox One is certainly a marvel of technology, with amazing graphics and cool games like Battlefield 4, Call of Duty: Ghosts and Ryse:Son of Rome. But it also has more mainstream consumer applications like Netflix (NFLX[3]), Hulu Plus, ESPN and Skype. There is also seamless integration with a myriad of devices, such as Google’s (GOOG[4]) Android and Apple’s (AAPL[5]) iOS.

It seems that there has been endless talk that game consoles will suddenly “take over the living room.” So far, that hasn’t played out … but the shift may be underway. After all, people are becoming more accustomed to technology, especially smartphones. And the Xbox One has the kinds of features that would make for an great in-home entertainment system.

But recent news out of China might be the best thing MSFT has heard in quite a while.

Xbox One Has a Major Opportunity in China

The biggest opportunity for the Xbox One could be China, now that the Chinese government has removed its 14-year-old ban on the sale of gaming consoles. China is the No. 3 market for video games, with a market size of almost $14 billion in 2013.

Yet this may pale in comparison to the mainstream home entertainment market. With millions in China entering the middle class, there is lots of purchasing power for next-generation entertainment technologies.

Already MSFT has taken steps to capitalize on the potential opportunity with the Xbox One. For example, in September the company formed a joint venture with China’s BesTV New Media Group to focus on making family-oriented games and services.

There will be some challenges, of course. First of all, Sony (SNE[6]) is a strong player in the market. Its PlayStation 4 appears to be getting lots of traction right now, and SNE also has tremendous resources and an edge when it comes to Asian markets.

Next, China’s Internet infrastructure is far from robust. If anything, this was one of the sticking points with Apple’s iPhone deal with China Mobile (CHL[7]) to sell the iPhone. The concern was that connectivity would fall short for many users and make for a subpar experience.

But over time, these problems will be solved. More importantly, there shouldn’t be any slow down in demand for high-end entertainment systems, which is certainly good news for MSFT. The company is only one of a small number of players that can win the market — which should be big enough to move the needle.

Right now, the Hardware segment of Microsoft’s Devices and Consumer division only represents 8% of overall revenues. But if the Xbox One takes off in China, profits could soar … along with MSFT stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8]. He is also the author of High-Profit IPO Strategies[9], All About Commodities[10] and All About Short Selling[11]. Follow him on Twitter at @ttaulli[12]. As of this writing, he did not hold a position in any of the aforementioned securities.